Daraja Ltd v Hogan and Partners Stockbrokers Pty Ltd
[2012] WASC 256
•13 JULY 2012
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION: DARAJA LTD -v- HOGAN & PARTNERS STOCKBROKERS PTY LTD [2012] WASC 256
CORAM: KENNETH MARTIN J
HEARD: ON THE PAPERS
DELIVERED : 13 JULY 2012
FILE NO/S: CIV 1550 of 2010
BETWEEN: DARAJA LTD
First Plaintiff
MARK JOHN MULLER
Second PlaintiffBRIAN WILLIAM BRIDGES
Third PlaintiffDELON GOTFRIED VAN ZYL
Fourth PlaintiffPAUL MACHIEL BERGH
Fifth PlaintiffAND
HOGAN & PARTNERS STOCKBROKERS PTY LTD
First DefendantJONATHON KUR
Second DefendantSECURITIES EXCHANGE GUARANTEE CORPORATION LTD
Third Defendant
Catchwords:
Practice and procedure - Application for further and better discovery - Third defendant - Guarantee fund - Tax returns sought - Foreign residents - No issues raised by pleadings - Serious misconduct - Fishing expedition - No basis in potential relevance of documents shown
Legislation:
Nil
Result:
Application refused
Category: B
Representation:
Counsel:
First Plaintiff : No appearance
Second Plaintiff : No appearance
Third Plaintiff : No appearance
Fourth Plaintiff : No appearance
Fifth Plaintiff : No appearance
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : No appearance
Solicitors:
First Plaintiff : Tottle Partners
Second Plaintiff : Tottle Partners
Third Plaintiff : Tottle Partners
Fourth Plaintiff : Tottle Partners
Fifth Plaintiff : Tottle Partners
First Defendant : DLA Piper Australia
Second Defendant : In person
Third Defendant : Clayton Utz
Case(s) referred to in judgment(s):
Armitage v Nurse [1998] Ch 241
Compagnie Financière du Pacifique v Peruvian Guano Co (1882) 11 QBD 55
Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255
Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2010] WASC 218
KENNETH MARTIN J: This application, determined on the papers, is the third defendant's application by chamber summons for discovery of particular documents and the provision of particulars.
On 24 May 2012 I ordered the plaintiffs to file any affidavit evidence in relation to the third defendant's chamber summons by 7 June 2012. I also ordered the third defendant to file and serve an outline of submissions and list of authorities in support of its application by 14 June 2012, with the plaintiffs to file their submissions and list of authorities in opposition by 28 June 2012.
A request for further particulars also made by the third defendant is no longer pressed save in respect of costs. On 15 June 2012, the plaintiffs provided answers to the third defendant's request for further and better particulars which had been made on 11 April 2012. The third defendant is satisfied with those answers.
The residual issue concerning the costs of the application as it relates to particulars raises the unappealing prospect of evaluating a dead argument to determine the merits of the third defendant's request for further and better particulars, with each side contending that it was in the right. For the third defendant's part, it says it has been vindicated by the eventual answers, which were filed only shortly before the third defendant was due to file its written submissions. For the plaintiffs' part, they say they only answered the request to avoid wasteful arguments, providing answers in circumstances where doing so was strictly unnecessary, and that this was a reasonable approach to take. I think there is some prima facie merit in the contentions by both parties as regards the answers to those particulars.
The prospect of making a final, but wholly theoretical, evaluation about the obligation to provide particulars, solely in order to evaluate who should pay costs, is wholly repugnant to the CMC List's objectives of proportionality and efficiency. In these situations, the court's approach needs to be swift and relatively broadbrush as regards interlocutory costs orders. My view is that the costs associated with the third defendant's endeavours for further and better particulars should be the third defendant's taxed costs in their cause against the plaintiffs in this litigation. In other words, the third defendant will only obtain these taxed costs if its present indemnification resistance position is vindicated at a trial. Otherwise there will be no order favouring either party concerning these costs.
That leaves for resolution from the third defendant's chamber summons of 22 May 2012 the major issue concerning further and better discovery by the plaintiffs, which is requested by the third defendant but strongly resisted by the plaintiffs. As to this application, the third defendant seeks that:
3.The Plaintiffs discover and serve on the Third Defendant a supplementary and verified list of documents in their possession, power or control that fall within the categories set out in the letter from Clayton Utz to Tottle Partners dated 8 May 2012.
The resisted application is framed by solicitor affidavits on both sides. For the third defendant, two affidavits of Robert Swinburne Cutler sworn 22 May and 29 May 2012 are relied upon (including 10 attachments found within those affidavits). In response, the plaintiffs rely on the affidavit of Ms Maha Chaar sworn 13 June 2012 (with its four attachments). Ms Chaar is a solicitor in the employ of the plaintiffs' solicitors.
From par 3 of the third defendant's chamber summons, it can be ascertained, from reference to the third defendant's solicitors' letter of 8 May 2012, that two classes of documentation about tax returns are sought, namely:
1.All tax returns submitted to any government authority by any of the first, second and third plaintiffs for any financial year falling wholly or in part within the period May 2005 to December 2008.
2.All tax returns submitted to any government authority by either of the fourth and fifth plaintiffs for any financial year falling wholly or in part within the period March 2008 to December 2008.
This is an application for further discovery. It is advanced by reference to classes of document, not specific documents (see Rules of the Supreme Court 1971 (WA) (RSC) O 26 r 6(1)). Discovery has already been provided by the plaintiffs. Accordingly, the third defendant carries an onus to show that:
(a)the further classes of documents exist, or are very likely to exist, in the possession of the plaintiffs; and
(b)the further classes of documents which are sought by further discovery are relevant.
The process of discovery, given its origins in the Court of Chancery, carries discretionary considerations: see Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2010] WASC 218 [4] (Murphy JA). Moreover, since this is an action proceeding in the CMC List, this court's paramount objectives of efficiency, cost minimisation and proportionality, particularly against any prospect of unnecessary interlocutory disputation, are important surrounding policy considerations.
To evaluate the potential relevance of the categories of documents sought, it is necessary to say something about the wider context of the present dispute, by reference to the parties' pleadings. In that regard, I refer to the plaintiffs' substituted statement of claim filed 12 December 2011 (SSOC) and the defence of the third defendant filed 3 February 2012.
The background to the action essentially is a serious fraud perpetrated by the second defendant, Mr Kur, against the plaintiffs' funds held with the first defendant. Mr Kur, at relevant times, was an employee of the first defendant, which was a firm of stockbrokers operating out of Perth, Western Australia.
Default judgment for an unliquidated amount was obtained by the plaintiffs against the second defendant on 24 May 2010. Hence Mr Kur has not been an active participant in proceedings. The third defendant was only recently added as a party to the action pursuant to my orders of 9 December 2011.
In pars 23 ‑ 27 of the SSOC, which appear under the heading 'Kur's Fraud', the plaintiffs allege:
23.From about December 2005, whenever necessary Kur applied funds which Hogans held on account of the second to fifth plaintiffs, alternatively the plaintiffs, to settle daily amounts due from Hogans to the Australian Stock Exchange in respect of losses which any clients of Hogans had incurred on that particular day.
24.Notwithstanding that Kur applied funds as alleged in paragraph 23 above, between December 2005 and November 2008 Hogans sent monthly statements (the Monthly Statements) to the second to fifth plaintiffs, alternatively the plaintiffs, each of which:
(a)falsely concealed the use of the funds as alleged;
(b)falsely represented that the plaintiffs' capital had been preserved; and
(c)falsely represented that each of the plaintiffs had earned a return on that capital.
25.The second to fifth plaintiffs, alternatively the plaintiffs, relied upon the Monthly Statements which were sent to them by continuing to place funds with Hogans, and by not withdrawing the funds held on their behalf by Hogans.
26.In December 2008:
(a)the matters referred to in paragraph 23 were discovered by the principals of Hogans;
(b)consequently, Kur ceased being employed by Hogans.
27.On 30 January 2009, Hogans returned all of the funds which it then held on account of the second to fifth plaintiffs which totalled $205,626.32. (particulars omitted)
(In the particulars to SSOC par 10(b), it is asserted that the first plaintiff, Daraja Ltd, placed $5,464,583.43 with the first defendant in a trading account in the period between May and December 2005, for purposes of trading. The second plaintiff, Mr Muller, is said to have placed $498,285 with the first defendant in the same period. The third plaintiff, Mr Bridges, is said to have placed $437,145.39 with the first defendant in the same period. Paragraph 19 alleges that further sums were placed with the first defendant by Mr Muller and Mr Bridges, in the amounts of $1,633,912.65 and $1,619,965.99 respectively.)
So, between them, Daraja Ltd, Mr Muller and Mr Bridges say they advanced funds to trading accounts operated for them by the first defendant in the amount of approximately $9.65 million, in the period from May 2005 to November 2008. Beyond that, the fourth and fifth plaintiffs, Mr Van Zyl and Mr Bergh, say they also opened trading accounts with the first defendant, in March 2008. They allege that in April and November 2008, they placed with the first defendant for the purposes of trading $200,457.65 in the case of Mr Van Zyl, and $214,401.95 in the case of Mr Bergh.
At par 5 of its defence, filed 3 February 2012, the third defendant pleads that it does not know and cannot admit pars 10 ‑ 38 of the SSOC. Accordingly, the averments of the plaintiffs as to 'Kur's fraud', to which I have referred above, are only responded to by a plea of non‑admission by the third defendant. Essentially, no affirmative defences are raised by the third defendant to that point in its defence.
The plaintiffs all raise, as against the first defendant, contractual and fiduciary claims as well as statutory claims for misleading or deceptive conduct contrary to the Australian Securities and Investments Commission Act 2001 (Cth) (see SSOC pars 34 ‑ 38).
The plaintiffs' pleas in pars 28 ‑ 38 as to their causes of action against the first defendant are also not admitted by the third defendant.
Paragraph 39 of the SSOC is admitted by the third defendant (see defence par 6). By par 7 of its defence, the third defendant does not admit pars 40 ‑ 42 of the SSOC, which concern the asserted entrusting of money by the plaintiffs to the first defendant.
Only from par 8 onwards in its defence does the third defendant make any affirmative pleas. These are first put in response to par 43 of the SSOC.
Paragraphs 43 ‑ 45 of the SSOC are as set out below. They concern the plaintiffs' indemnification claims against the National Guarantee Fund (NGF) established and held on trust by the third defendant pursuant to s 889C(2) of the Corporations Act 2001 (Cth) for the purposes of Div 4 of Part 7.5 of that legislation (see also s 890A of the Corporations Act referred to in SSOC par 9):
43.By letter dated 19 May 2009, the second to fifth plaintiffs, alternatively the plaintiffs, made a claim against [the third defendant] for compensation from the NGF.
44.Since the claim pleaded in paragraph 43 was made, there has been adequate time for [the third defendant] to consider the claim, and it has not allowed the claim.
45.In the circumstances of paragraphs 39 to 44 above, by reason of paragraphs 7.5.64(2) and 7.5.64(3) of the Corporations Regulations, [the third defendant] is obliged to allow the claim and to pay the amount of the claim which has not been discharged.
By its defence, the third defendant, in response to SSOC pars 43 ‑ 45, says:
8.The third defendant:
(a)denies paragraph 43 of the substituted Statement of Claim and says that no claim against the SEGC for compensation from the NGF was made by any of the plaintiffs prior to 21 April 2010; and
(b)says further, or in the alternative, that the plaintiffs first supplied documentary material in relation to their claims on or about 7 May 2010.
9.The third defendant admits it has not allowed the plaintiffs' claims, but denies the balance of paragraph 44 of the substituted Statement of Claim.
10.The third defendant denies paragraph 45 of the substituted Statement of Claim and further says that, at the date of filing of the substituted Statement of Claim, the third defendant could not allow or disallow the plaintiffs' claims because it had requested, and required, further information in order for it to determine the claims, which information the third defendant had not had the opportunity to consider. [Particulars referring to communications between the parties' respective solicitors and involving ASIC in the period between 24 October 2011 and 25 November 2011 are provided]
As regards the pleaded issues in the litigation as between the plaintiffs and the third defendant, it will now be seen that, up to par 10 of its defence, the third defendant raises very little in terms of affirmative defence averments. Its position is essentially framed by non‑admissions, denials or its asserted need for further information from the plaintiffs, which it pleads it has not had an opportunity to consider.
The third defendant's defence concludes by par 11, the terms of which suggest asserted contributory negligence by the plaintiffs, lack of causation of the plaintiffs' loss by reason of the contributory negligence and, in the alternative, a need for a statutory apportioning of the plaintiffs' ultimate loss as a result. Paragraph 11 provides:
In further answer to the whole of the substituted Statement of Claim the third defendant says that:
(a)if (which is not admitted) any or all of the plaintiffs have suffered loss, then such loss was caused, at least in part, by the plaintiff or plaintiffs who suffered it failing to take reasonable care of its, his or their own interests in relation to the use of any money paid to the first defendant; and
Particulars
The plaintiffs failed to take reasonable care of their own interests in relation to the use of any money paid to the first defendant by failing to exercise adequate control over or to have sufficient involvement in the selection of investments made on their behalf, and by failing to make adequate enquiries as to the means by which the first defendant had achieved and was achieving the well‑above market results reported to them.
Further particulars will be given after discovery.
(b)accordingly, if (which is not admitted) any or all of the plaintiffs are entitled to compensation from the third defendant, the amount of that compensation is liable to be reduced to the extent of the responsibility of that plaintiff or those plaintiffs for causing its, his or their own loss.
The suggested contributory negligence of the plaintiffs is put in very bland terms as a failure to exercise 'adequate control', have 'sufficient involvement' in their investments or to make 'adequate enquiries' about the performance of their investments. Nothing in these pleas approaches the level of a suggestion that the plaintiffs knew or suspected that Kur's fraud was being carried out against their funds.
That is the pleading background from which the third defendant presses the relevance on discovery of the plaintiffs' tax returns, wherever filed, for the first to third plaintiffs, over the financial years within the period May 2005 to December 2008, and for the fourth and fifth plaintiffs, for any financial year falling within the period March 2008 to December 2008. For completeness I will mention the defence of the first defendant, which has not altered since it was filed on 9 June 2010. Broadly speaking, it adds little to the debate in terms of issues. The first defendant's defence largely consists of admissions and non‑admissions.
Resistance to the request to discover the plaintiffs' tax returns
In a communication sent on 23 May 2012 by the third defendant's solicitors to the plaintiffs' solicitors, the third defendant's solicitors made observations concerning the reasons given by the plaintiffs' solicitors for resisting discovery of the plaintiffs' tax returns. They particularly noted that the plaintiffs had articulated through their solicitors that they did not 'hold any tax returns which contain claims for any losses, or declarations from any profits, arising from trades conducted by Kur or Hogan & Partners on behalf of each of [their] clients'. It is significant to my ultimate conclusion that this negative proposition concerning the content of the plaintiffs' tax returns was stated in open correspondence.
The third defendant's solicitors responded:
We do not agree with you that your clients are not obliged to discover the Requested Documents because of the statement contained in your 16 May letter quoted above. The Requested Documents are relevant even if they do not make any reference to the plaintiffs' investments with the first or second defendants.
Whether your clients' declared income or not relates to:
(a)the issue of whether they in fact relied upon the monthly statements they received from the first and/or second defendant in continuing to deposit moneys and not withdrawing moneys from their accounts with the first defendant - see paragraphs 24 and 25 of your clients' Substituted Statement of Claim;
(b)as a result of (a), the circumstances in which the plaintiffs provided moneys to Hogans and, accordingly, the allegations made in paragraph 40 of the Substituted Statement of Claim. For example, if the plaintiffs knew that the monthly statements they were receiving were inaccurate and that the gains those statements recorded had not, in fact, been made, but continued to provided [sic] moneys to Hogans anyway, it would seem unlikely that they did so in some naïve belief that the funds would only be used for 'authorised investments';
(c)more generally, the plaintiffs' conduct in relation to their dealings with Hogans. For example, if, despite believing that the gains recorded in the monthly statements they received from Hogans were true, the plaintiffs never included those gains in their tax returns for the relevant years (either separately or as part of any cumulative amount), then that would raise an issue as to the lawfulness of their conduct. This, in turn, would raise issues as to the enforceability of the alleged undischarged obligations which they assert Hogans had to them (see paragraph 41 of the Substituted Statement of Claim) and as to their entitlement to claim on the NGF.
The references in pars (a), (b) and (c) to 'monthly statements' lead back to pars 24 and 25 of the SSOC which I have already set out.
It is now established in open correspondence from the plaintiffs' solicitors that no income, profit, gain or loss shown on any of the monthly statements issued by the first defendant was addressed by the plaintiffs' tax returns wherever lodged. The third defendant's correspondence appears to suggest the prospect of inferring from that negative position some defence that the plaintiffs actually knew that in truth there were no profits or income being generated by reason of Kur's frauds. But that is a long bow to draw even allowing for an application for discovery of a Compagnie Financière du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 line of enquiry approach, which is wider than the relevance test for the admissibility of evidence at a trial. It is a long bow because, as we have now seen from the pleadings, there is no plea in the third defendant's defence to the effect that one or more of the plaintiffs knew of or even suspected Kur's frauds. I have mentioned the third defendant's bland plea of the plaintiffs' alleged contributory negligence, but to suggest the plaintiffs had knowledge of Kur's fraudulent diversion and squandering of their funds is something else altogether and well beyond the limits of a legitimate line of enquiry test for discovery assessed by the parameters of these pleadings.
To assert that the plaintiffs knew of Kur's defalcations of their funds, yet said and did nothing despite that knowledge, is a very serious assertion. Such an assertion must be squarely articulated by a pleading and not just raised as a speculative theory to probe by discovery. Moreover, that theory must have some reasonable basis in fact to sustain such a pleading, if one is ever made to that effect.
The reasoning underlying argument (a) in the 23 May 2012 communication is plainly speculative. There is nothing at all yet pleaded by the third defendant to lay down any basis, let alone a legitimate basis, to argue that one or more of the plaintiffs knew of the fraud or did not rely on the monthly statements, or to pursue a line of cross‑examination to that end.
Argument (b) in the 23 May 2012 communication is fatally dependent upon argument (a). It is again based upon a speculative, unpleaded theory as to the plaintiffs' possible knowledge that the monthly statements they were receiving were inaccurate. I will not allow what would be a documentary fishing expedition supported by nothing more than a line of base speculation.
Then appears the even more general argument (c) in the 23 May 2012 communication, concerning possible unlawfulness in the plaintiffs' conduct by not including gains in their tax returns. This assertion is even more serious, but equally speculative. To seek to advance what would be a very grave allegation of unlawful conduct against the plaintiffs, some basis in underlying fact must first be made apparent. At present, nothing even approaching a basis for this serious contention is pleaded. No doubt that is for good reason. Barristers know that serious assertions of misconduct in a pleading require a proper factual foundation: see Western Australian Barristers' Rules rr 60(a), 64 and 65, and Legal Profession Conduct Rules 2010 (WA) r 36. See also Armitage v Nurse [1998] Ch 241, 256 ‑ 257 and Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255 [38].
Open correspondence has clearly established, if it is relevant, that there was no declaration by the plaintiffs in their overseas tax returns of any profits or losses arising from trades conducted by Kur or the first defendant. From that established premise of fact the third defendant may seek at the trial to advance whatever legitimate arguments are open, if any. But at present, the third defendant has raised no basis for a plea of unlawfulness against the plaintiffs in its defence.
The plaintiffs' tax returns are not relevant on the pleadings as they stand at present. The discovery sought by the third defendant is a paradigm example of a fishing expedition which will not be allowed. It is the parties' pleadings that frame the parameters of relevance for the issues in the case and the ambit of allied discovery obligations, not the reverse.
Ms Chaar's affidavit of 13 June 2012 makes it clear that the first plaintiff, Daraja Ltd, is a corporation incorporated under the laws of Guernsey and the Companies (Guernsey) Law 1994. The uncontradicted evidence is that the first plaintiff has not filed tax returns in Guernsey. Hence, it is shown no such documents exist. Ms Chaar's evidence on the point, based on information and belief with sources properly identified, is admissible. It is a prerequisite to an order for further and better discovery that an applicant show a basis for an expectation that the document or class of document sought actually exists in a party's possession (unless the discovering party can be shown to have misconceived its obligations). As regards Daraja Ltd, the existence of the tax returns sought is not established: see par 7(h) of Ms Chaar's affidavit.
The second plaintiff, Mr Muller, is a citizen of the United Kingdom, but is resident and domiciled in Botswana. He has filed tax returns in Botswana. The evidence is that those tax returns need only disclose income he has earned in that country. The position in respect of the third plaintiff, Mr Bridges, is the same.
The fourth plaintiff, Mr Van Zyl, is a citizen of South Africa. He is resident and domiciled in Botswana. The fifth plaintiff, Mr Bergh, is a resident and citizen of South Africa. The evidence is that Mr Van Zyl has filed tax returns in Botswana. Mr Bergh has filed a tax return in South Africa.
The evidence from Ms Chaar's affidavit is that none of Messrs Muller, Bridges, Van Zyl or Bergh have declared in any tax return any income or any loss arising out of the funds placed with the first defendant.
The third defendant has failed to show any basis for the orders for further and better discovery as regards these tax returns. The application should be dismissed and the third defendant must bear the taxed costs of its failure on its application for further discovery.
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